The European Central Bank said on Thursday that recent economic surveys and indicators had shown signs of stabilizing, suggesting an improved picture later in the year.
"The economic weakness in the euro area is expected to extend into 2013," ECB President Mario Draghi said at a news conference. "Later, in 2013, economic activity should gradually recover.
"Several ... indicators have broadly stabilised, albeit at low levels and financial market confidence has improved significantly," he said.
He was speaking after the ECB held its main interest rate at 0.75 percent. Draghi reiterated the ECB's view that inflation, which held at 2.2 percent in December, would fall below 2 percent during the course of this year. The central bank targets inflation of below, but close to 2 percent.
"Over the policy-relevant horizon, inflationary pressures should remain contained," Draghi said.
The euro rose against the U.S. dollar after the rates decision to $1.3115, from $1.3096 beforehand.
All members of the ECB's Governing Council were in favor of keeping interest rates unchanged when they met, Draghi said.
He said bond yields and the cost of insuring against sovereign defaults were "significantly lower", while stock markets were stronger and less volatile.
Draghi also cited factors including strong capital inflows into the euro area and a rise in deposits at banks in periphery countries.
"But all this has not found its way through to the real economy yet," Draghi said, noting that the euro zone economy continues to be weak. "So there was no reason to change the medium-term outlook for price stability."
A Reuters poll published on Monday had pointed to the ECB keeping rates on hold, though the economists surveyed were split on the chances of a cut in the next few months.
An improvement in euro zone business morale in December, when a survey also pointed to a slowing service sector contraction, suggest a modest turnaround in the bloc after a grim fourth quarter.
